Much More In Store For Apple TV

John Falcone over at CNet's Crave blog asks the question, "Is the Apple TV officially a flop?".
Coincidentally, Leander Kahney over at Wired recently asked me a
variant of the same question in a recent email. My answer to both: I
believe Apple TV is selling according to Apple's (NASDAQ:AAPL) expectations at
present, which is somewhat north of 100,000 units sold this year. Why
so few? Because Apple hasn't yet introduced all the content and
services that fulfill its vision for the product.

I believe that
Apple has three features that will fulfill Steve Jobs claim that the
Apple TV is destined to be "the new DVD player" for consumers:

Movie rentals.
Unless you are a movie connoisseur, you don't buy movies; you rent
them. Apple plans to add $2.99 movie rentals to the iTunes store that
allow unlimited viewing for 30 days as soon as the movie studios sign
off on the deal (which, admittedly, could be never). By undercutting
your local Blockbuster and cable on-demand movies and providing a
longer period of time to view the movie, we believe that this offer,
when available, will rapidly become the second largest source of
revenue for the iTunes Store.

High-definition content
The Apple TV has often been criticized for not having high-definition
movies available, especially given that the device only offers
high-definition composite and HDMI outputs. Again, Apple has
high-definition movies prepared and ready for sale from the iTunes
store, just as Microsoft has done with its XBox movie service. But
Apple, noting the challenges with distributing six to ten gigabyte
high-def movie files, has kept this offer in its back pocket until the
last piece of the puzzle is ready, namely:

Encrypted peer-to-peer (P2P) Internet distribution. Despite Apple's long-standing relationship with Akamai and its new high-definition video distribution system,
we believe that Apple has built an encrypted BitTorrent-like
distribution system into Leopard, Apple's new operating system
scheduled to be released this month. While any consumer will be able to
download high-definition movies, Apple users with Leopard or an Apple
TV device will be able to opt-in and redistribute those movies to other
users in exchange for iTunes credits. In essence, Apple's customers
will become a secondary distribution channel for iTunes and will save
Apple millions in bandwidth charges to boot. But to guarantee the
security and safety of this system, consumers will need Leopard as
their platform.

Why are we so bullish on Apple TV
rather than joining the chorus claiming it's just a losing product?
It's simple: unlike most of Apple's products, Apple TV revenue is being
deferred over 24 months to allow for software upgrades, just as the
iPhone is. If it were just a product that missed the mark (unlikely,
but always possible), Apple never would never have planned to defer the
revenue from selling it; it would have treated it like an iPod and
recorded the one-time revenue. But the 24-month amortization of the
revenue indicates that Apple plans at least two years of enhancements
and upgrades to the device. Judging the device to be a flop without
knowing its targeted feature set seems at best premature.

At
Walt Mossberg's D conference, Steve Jobs called Apple TV "a hobby." We
think that was simple misdirection. Apple TV is a hobby when all the
pieces of the product aren't available. But when Apple actually fleshes
out the full offer, Blackfriars projects that that hobby will pull in
more than $1.8 billion in fiscal 2009. And that would make me call that
hobby a business -- a big business.